By Casey Hall
with contributions from Amanda Kaiser
 on December 14, 2016

Shares in beautifying app developer and mobile phone manufacturer Meitu made a less-than-stellar debut on Hong Kong stock exchange Thursday. Despite making gains in early trade, they lost ground through the day and finished flat.

Meitu’s ipo was being closely monitored by other technology and consumer product startups in China as an indication of whether there’s investor appetite in Hong Kong for similar listings in the near future. It’s been a relatively quiet year for new offerings in Hong Kong. Meitu sold 574 million shares, generating 4.88 billion Hong Kong dollars, or $629 million, from its ipo. The company’s offer is the biggest tech offering Hong Kong has seen since Alibaba Group went public in 2007- it delisted its Hong Kong shares in 2012 before embarking on its record-breaking ipo and listing on the New York stock exchange in 2014.

Xiamen-based Meitu priced its ipo at 8.50 Hong Kong dollars ($1.10) per share and saw shares rise to as high as 8.78 Hong Kong dollars in early trade, before falling back to finish the day where it started at 8.50 Hong Kong dollars. Hong Kong’s Hang Seng index fell 1.8 percent to end at 22,059 following news the U.S. Federal Reserve raised interest rates. Shanghai’s SSE fell 0.7 percent to finish at 3,118 while Tokyo’s Nikkei 225 inched up 0.1 percent to end at 19,274.

The pricing of Meitu’s ipo was at the lower end of an indicative range of 8.50 Hong Kong dollars to 9.60 Hong Kong dollars per share, according to Reuters. Meitu declined to comment for this story.

Meitu, founded in 2008, makes apps that enable users to optimize their selfies and videos by smoothing skin, brightening eyes or utilizing AI technology to virtually “try-on” beauty products. The company self-reports approximately 450 million monthly active users (MAU) of its retouching apps and popular live-streaming service, Maipai, which would make the company one of China’s top ranked photo and video app providers. But Meitu’s cell phone division, which accounts for 95 percent of its revenue, has been dragging down the company’s performance.

In the first half of 2016, according to consultancy Canalys, Meitu sold less than 300,000 handsets, making it a very niche player in the Chinese market, where 100 million smartphones will be sold this year. Meitu’s phones feature special camera and photography features.

Meitu has been posting losses for the last three years, according to its preliminary prospectus. Its losses reached 2.2 billion yuan ($317 million) during the first six months of this year, as its smartphone sales failed to cover huge marketing and R&D (research and development) costs. Analysts have voiced concerns about the company’s financial standing.

“There are a few things amiss on [the financial] front starting with the reported number of monthly active users. The way the company reports its MAU is not inline with what other firms report and it doesn’t seem to have a sense of its unique MAU’s across its different apps,” said Sumeet Singh, head of ipos and placements for Smartkarma.

Patrice Nordey, ceo of digital inception agency Velvet questioned Meitu’s business model and the timing of its ipo.

“Right now the money is coming form smartphones, but if you are not a giant company in the handset market you won’t survive, the margins are too low. The brand isn’t strong enough to drive a huge number of people to buy a Meitu phone,” he said. “They have global ambition, an active user base, but I don’t see how they will generate revenue from their users. The decision to go public now means they will be scrutinized by investors and their business is simply not ready.”

In response to its profitability problem, Meitu launched a new chat application called Shanliao – which is similar to Snapchat – in October as part of a bid to increase user engagement and stickiness. The company also plans to start a beauty e-commerce platform in the first half of 2017, which the company claims will help it turn a profit by the end of 2017.

More than 200 merchants have expressed interest in promoting themselves through on its beauty e-commerce platform, the company said in a pre-ipo filing. But analysts voiced skepticism as to whether the company can ever be a serious contender in a competitive market.

“As for e-commerce, they can only be a niche player in cosmetics if they ever do manage to make this segment take off. In the near-term, [in-app purchases] has the most potential,” said Smartkarma’s Singh.

According to Mariana Kou, head of China education and Hong Kong consumer at CLSA, Meitu is operating at an interesting and trendy intersection of consumer products and technology.

“Meitu is one of the best names in China’s app market and they are part of a trend that is going to continue for more pictures and more videos, so I think they will be one of the top players in this segments. With economies of scale and offering leverage from being one of the leaders in this segment they are positioned to benefit hugely,” she said.